Husband's Corporation's Increase in Value Was Subject to Wife's Claim

Interest in corporation was a right to reimbursement not an interest in the entity.

In a bifurcated declaratory relief action, Wife, through her lawyer, asked the Court to determine her community property interest in Alacer stock. However, the trial court found the stock was Husband’s separate property. The court did find that Wife had a community property interest in the increase in value of the stock during the marriage. As such, it awarded ½ over ($3.2 million) to her, plus prejudgment interest.

As a result, the Court later granted judgment on the pleadings for defendants on Wife’s derivative shareholder claims, finding that her standing turned on a community property interest in Alacer stock which she did not have. The Wife’s community property interest was only in Alacer’s increased value, not the stock itself. The Wife, through her lawyer, appealed, arguing the court used the wrong valuation method; it should have awarded her Alacer stock; and it wrongly entered judgment on the pleadings against her.

The Court of Appeal affirmed. The Court reasoned that the Wife had community property interest in Alacer’s increased value during marriage, and trial court was within its discretion in using Pereira to apportion Alacer’s value at date of the Husband’s death using “capitalization of excess earning” method. The Court of Appeal thus found substantial evidence showing that the wife had a community property interest in Alacer’s increased value during the marriage, and supported apportioning that interest.

The wife, through her lawyer, contended that her community property interest in Alacer’s increased value had to be satisfied with an award of Alacer stock. The Court rejected this argument because the trial court found there was no “community property interest in [Husband’s separate property] Alacer stock,” and there was no other requirement that the trial court use Alacer stock to satisfy a community property interest in Alacer’s increased value. Second, the wife, through her lawyer, asserted that she and husband stipulated that she would receive her community property interest in the form of Alacer stock. The Trust did not support this contention, however. Third, the wife contended Alacer became community property because Husband commingled her community property interest with his separate property, and that his community efforts were “reinvested” in Alacer against her will. The Court of Appeal squarely rejected this, explaining that California law does not require apportionment of community efforts devoted to separate property on an ongoing basis, upon pain of transmuting that separate property into community property. Rather, community efforts toward separate property accounted for through equitable apportionment after the marriage, not transmutation during the marriage. See, e.g., In re Marriage of Dekker (1993) 17 Cal.App.4th 842, 852-853.

Finally, the wife, through her lawyer, argued that she should receive a pro tanto interest in Alacer, relying on case law giving the community a pro tanto interest in separate property purchased, paid down, or improved with community funds (Moore / Mardsen). The Court of Appeal rejected this too, noting that using the family law Moore / Marsden approach here would conflict with the prevailing approach used when a separate property business is improved by the devotion of community efforts – equitable apportionment using the family law Pereira or Van Camp cases.